Winter 2015

Tag Archives: uber

Thesis: Driverless cars will forever change the auto industry and create a more efficient system with less private ownership of automobiles.

Driverless cars are coming, and there is no stopping this massive new industry. The implications and potential impact of this new industry are so large that one could write a hundred blog posts. I will however, due to time, only focus on the personal ownership decreases that driverless cars will cause. This will disrupt the auto industry and completely eliminate some large automakers, unless they jump on board with this new technology, and fast.

As discussed by Chunka Mui in his Forbes article, “Personally owned cars are parked, on average, almost 95 percent of the time, so there is plenty of room to better utilize them through person-to-person car sharing or taxi-like car services.” This astonishing fact on the inefficiencies of current personal car ownership was astounding to me. It really opened my eyes as to the implications and how big this transition really can become. In the current day United States of America, it is almost a necessity to own a car, unless you live downtown in a large city. This is because public transportation is not widely available and easily accessible to all the little towns around. This could be changed by car sharing companies. I picture an app (much like, or possibly Uber) that allows an individual to schedule a car to come pick them up and drop them off at any time of the day. The costs that would be saved could be huge, since individuals won’t have to pay for auto insurance or make car payments every month. As mentioned later in Chunka’s article, “The same studies found that the cost of taxi service could be reduced by 50 to 80 percent by reducing labor cost and increasing operating efficiency through network coordination.” These cost savings will be enough to convince many people to not buy their own car, and instead rely entirely on car sharing services such as Uber.

While opponents to this argue that “The analysts write that “the average driver seems to like personal ownership over the alternatives, and the suburbs still dominate. 80% of people drive themselves to work alone. If people wanted more carpooling or mass transit, we could already make those choices, and we don’t.” This however could be overcome with car sharing. People may not choose carpooling or mass transit options currently because they like the solidarity and alone time of the commute to work. This will still be largely available to individuals to call their own car to take just them to work. A combination of Uber and driverless cars presents a whole new innovation that is ripe to disrupt the automobile industry entirely.

Thesis: The declining taxi industry of New York is a case of idiosyncratic risk, and the industry should be allowed to fail as it has a readily available replacement.

This past Thursday in a New York Times interview, taxi mogul Evgeny Friedman called for the city of New York to back all loans made for medallion taxi purchases. Friedman contends that the taxi market is threatened by lack of credit available to would-be taxi purchasers, and that a lack of action from the city would impact the taxi industry across the entire country. He even went so far as to claim that the taxi industry is “too big to fail,” comparing the situation to that of the financial industry during that of the mortgage-backed security crisis. But he is applying the label of “too big to fail” to an entire industry, whereas the term originated (and has historically been used) in reference to single corporations. And it’s worth asking the question: if an entire industry needs government intervention to keep it afloat, then is it even worth saving that industry?

The financial institutions that received bailout packages during the recession got them because their failure would have meant a nationwide freezing of credit and shock to financial asset prices. A failure of the medallion taxi cab industry would mean a loss of tax revenue to the city and a shortage of taxis available to riders. But while the services provided by major banks are incredibly hard to replace, the problems associated with a failure of the taxi industry have easier solutions which would be quick to implement. As taxi drivers see less and less income and take their cars off the road, their main competitors (Uber and Lyft drivers) will find their services producing more income, and new drivers will emerge until the supply of drivers and the demand for rides hit equilibrium. And while the loss of tax revenue is certainly material (New York collects 50 cents for each ride, and at 600,000 rides per day [according to a New York City factbook], the city sees about $109.5 million in annual tax revenue), taxes can be applied to Uber and Lyft rides in the same fashion.

What Friedman is really asking for is a “save my business model” bailout. There are few legitimate arguments to made as to why the taxi industry should not be allowed to fail. And in reality, taxis probably won’t completely fail for quite a few years. The price of a yellow medallion cab will certainly fall and taxis on the road will be replaced by drivers from other services, but taxis likely won’t suffer from a sudden mass extinction. Friedman, who is significantly biased (he owns 1/6th of New York’s taxis – worth about $1 billion), is overstating the economic threat. He merely overspeculated on the rising prices of an asset (taxis), and is now reaping punishment.

Thesis: Uber must find a solution to extreme fare surges or else it will alienate its consumer base and become irrelevant.

Why does Uber use Surge Pricing?

Uber hikes up prices during times of high demand for multiple reasons. Firstly, they value supply of available rides over reasonable prices. Uber is aware that unreasonable fare surges (for example 6x baseline fare) turn consumers away and they are actually fine with that. https://medium.com/@jimbumbulsky/the-true-economics-of-ubers-surge-pricing-2ed9de90fcae They would rather consumers see that cars are available and choose not to order than to see that “no cars are currently available.” Secondly, surging creates the illusion that Uber is more popular than perhaps it is. Potential consumers who need a ride see that fares are currently higher than normal and whatever reason they wanted a ride in the first place is amplified. If skies are grey and a consumer thinks it might rain, seeing a fare surge lets them know that others think the same or it probably is already raining elsewhere in town. Thirdly, Uber believes surge pricing makes driving for Uber more appealing, thus getting more drivers on the road. In reality, Uber’s surge pricing model is unclear and their website does not even include an explanation on how they price their rides during times of increased demand (https://www.uber.com/hc/en-us/articles/201836656-What-is-surge-pricing-and-how-does-it-work-). Therefore, this is not an automatic draw for those considering driving for Uber.

Uber’s Surge Pricing is detrimental to both consumers and the company for various reasons. First, fare surges alienate reasonable consumers considering taking Uber over a normal cab. It takes Uber from being “everyone’s private driver” to only the wealthy’s private driver. Surge pricing is bad for Uber’s drivers as it leads to drivers riding around with empty cars. This is frustrating especially in times drivers know are popular to take rides.

A particularly outrageous instance of fair surging occurred during the Sydney hostage crisis in December. Fares reportedly http://time.com/3633469/uber-surge-pricing/ surged to four times normal, at a $100 minimum. Dan Kedmey with Time magazine called this price gouging “Uber trying to capitalize on a potentially deadly emergency.” While Uber attempted to remedy the situation soon after offering free rides and refunds to those in vicinity of the attack, it still calls into question the algorithm Uber uses to hike fares. The algorithm senses when an area is experiencing high demand and low relative supply.

I don’t think any other company (Lyft etc) can sufficiently compete with Uber at this time, particularly in major metro areas and even more narrowly, in college towns such as Ann Arbor. So now is the time for Uber to not be so concerned with having “zeroes” (what Uber calls riders who open the app to see that no cars are currently available) and care more about the quality of the consumer’s experience and the satisfaction of current drivers.

How can Uber solve this problem?

Getting more drivers on the road would help Uber to not alienate as many consumers as it currently does and allow existing drivers to fill their cars more frequently when consumers are not scared off by fare surges.

Self-driving cars are one of the impending technological advancements that consumers are the most excited about. The idea that you could step into your car, punch in an address, and then divert your attention to something completely unrelated to driving while zooming to your destination is a very luxurious one, and it is one that is becoming more and more feasible every day. Google, one of the pioneers in the field of driverless cars, has a fleet that has clocked almost a million miles with just one accident – which occurred when a car was rear-ended while under manual use, as noted in The Telegraph. The company predicts that the product will be publicly available as soon as 2020, which is shockingly soon, all things considered.

Zack Kanter, a self-proclaimed futurist writing for CBS San Francisco, is one of the many extreme optimists regarding the topic of self-driving cars. Citing the many benefits to be gained by taking drivers out of the equation, such as virtually eliminating traffic accidents, saving millions of hours of manpower, and the rise of newly viable businesses as driving forces, he made dramatic predictions about how driverless cars will reshape the economy. Kanter believes that consumers will essentially abandon the car in favor of ride-sharing services like Uber, while said services make the transition from contracted drivers towards automatic cars. He anticipates these changes will take effect as soon as 2025 – in just ten years time. Is his prediction too bold? Some might say no: it’s incredibly hard to predict how technology can reshape our lives. Ten years ago people may have not believed you if you claimed that everybody would carry a personal computer-like device on them at all times, but smartphones made that a reality. However, in the case of self-driving cars, I think Kanter and leading industry members like Elon Musk, who claims that fully-autonomous driving will be on the market by 2020, are being a bit too optimistic.

I certainly can’t see the average American giving up car ownership within the next ten years. Consumers will see self-driving cars completely differently from how they currently view cars, since the product is fundamentally different. While I think there will be some early adopters, like there was in the case of hybrid cars, it will take a while for people to get comfortable with the concept of giving up driving completely. While it’s true that it’s often a chore, many people enjoy driving, and they certainly take pride in their cars. And driverless cars will almost certainly be quite expensive when they first become available, creating an economic barrier to widespread adoption. There’s also the question of how driverless cars will be handled legally. Even if there’s overwhelming evidence that they reduce accidents, there’s still the question of how liability will be determined in accidents when they do occur, especially while manually driven cars are still on the roads, and that’s an issue that may take years for precedent to develop. Traffic laws may need to be re-evaluated: would we still need stoplights if there are fewer cars on the road, and they’re being automatically driven? What about road signage or stop signs? Will parking lots and traffic tickets become a thing of the past, and if so, how are municipalities going to deal with the loss of revenue? The technology is an exciting one, but there are still plenty of questions that need to be answered before it can become the status quo.

Transportation, cleaning services, and even data entry all at the touch of a finger. Welcome to the 21st century. At first glance this seems like a great thing. I mean who doesn’t enjoy having the ability to order a ride from anywhere to anywhere at just the touch of a finger. With the rise of these apps and services, the landscape for many historic industries, like taxi cabs, is drastically changing. This is not necessarily a bad thing, the market is suppose to force out businesses that are not able to innovate to keep up with the changing demands of the market place. Much of the American economy, and capitalism for that matter, is structured around who can do something the best for the cheapest. Those are the companies that are suppose to thrive. There is, however, a great deal of controversy surrounding these new app based on-demand services. The controversy is arising, primarily relates to the treatment of the employees that are fulfilling all of these new roles.

“Current and former workers for Uber, Amazon Inc.’s Mechanical Turk and Handybook, better known as Handy, say on-demand work platforms give them little control over the terms of their labor, and complain that the contracts they’re required to accept force them to shoulder personal and financial risk without the returns or advantages they’d hoped for” (Weber, Silverman, 2015).

One of the main purposes of having a job is to provide stability for the employee and their family. With consistent biweekly paychecks, employees are able to determine whether the job provides enough to support themselves, and their potential family. They are able to make sure that their paycheck covers the necessary expenses, like rent, groceries, and insurance costs. This is not the case anymore with these new app based services, hopefully with a little extra to be put in the bank. Work hours are always fluctuating, and people can be terminated at any point, with the companies knowing that the job will always be filled.

Another main issue with these services, aside from job security and loyalty, is that these companies do not face the same regulation that other companies face who have employees rather than contractors.

“App-enabled workers don’t fit neatly into a regulatory landscape that recognizes only two types of worker: employees in traditional work relationships and independent contractors. Employees are generally covered by protections such as minimum-wage and antidiscrimination statutes, workers’ compensation, and union-organizing rights, while the latter have no such protections” (Weber, Silverman, 2015).

Lack of minimum wage requirements present the possibility, although rare, of earning less than minimum wage. For one firm, employee pay dipped as low as two or three dollars an hour, and even included non-monetary payments like reward programs and credits (Weber, Silverman, 2015). In a nation where the minimum wage is under a great deal of controversy for being too low, working for a company without fixed pay and the possibility of earning less than minimum wage can be extremely frightening. Although the convenience levels associated with these services are extremely high, the lack of stability these organizations are creating in the job market seems to be creating a system that does more harm than good.

App-based services like Uber and Airbnb, which source service costs and labor from individuals who wish to rent out their cars or homes, have carved out sizable chunks of the transportation and hospitality markets, much to the dismay of traditional taxi and hotel companies. Now Instacart Inc., a company that allows people to order groceries directly to their home with the push of a button, is attempting to do the same to the grocery industry, per the Wall Street Journal. The app, like Uber and Airbnb, circumvents the need for large capital investments by outsourcing their service to contracted individuals who provide the service instead. Rather than pouring millions into things like storage space and delivery trucks to establish a supply chain, Instacart simply sends a local driver to the nearest grocery stores to pick up the items that the consumer wants, delivers it to their homes, and profits by adding a slight mark-up to each item.

As a student without a car who lives miles away from any grocery stores, I have made extensive use of a similar service, Wolverine Grocery, and it has been a life-saver for me. I will gladly pay a small mark up on each item (which, like Instacart, is exactly how Wolverine Grocery operates) rather than face the alternative of having to find and pay for a ride both to and from the grocery store. As a consumer, it has made my life significantly easier, and so has Uber. Just as Wolverine Grocery has made it easier and cheaper for me to purchase groceries, Uber has made it easier and cheaper for me to solicit a taxi. From an anecdotal perspective, app-based services have raised my consumer welfare. In a recent study conducted by the University of Chicago’s Booth school, 100% of 40 leading economists either agreed or strongly agreed that allowing Uber to compete with the taxi industry would raise consumer welfare.

However, the societal costs of this new app-based approach to the service industry are not yet well-documented. As noted in the Wall Street Journal article on Instacart, the company does not have to pay employees a salary or benefits, since they are merely temporarily contracted. Uber employees have been recently outspoken in the Washington Post about how working for the company isn’t as great as promised – hidden paycheck deductions, on top of the cost of gas, taxes, car insurance, and repairs, have left some employees making as little as 3$ an hour, well below the country’s minimum wage. Consumers are ecstatic about the way the services industry is moving, but if the labor force is being swindled, it may only be a matter of time before regulators need to step in, which may make apps like Instacart unfeasible.

The rise of Uber to an over $40 billion valuation may seem absurd to most, but Uber is revolutionizing the way people travel within a city. Taxi drivers may scream and moan as much as they want, but Uber is here to stay. The taxi service business has been abysmal at best for years and needed an upgrade. As Brad Stone mentions in his article Invasion of the Taxi Snatchers: Uber Leads an Industry’s Disruption:

“San Francisco, like other urban centers, has long capped the number of taxi medallions, even as the population increased by 300,000 in the last 10 years. Dispatchers at the major cab companies didn’t seem to care about prompt customer service since they make money primarily by leasing their cars to drivers.”

This has caused companies that loan money to taxi drivers to buy a Medallion, such as Medallion Financial Corporation, to be losing share price drastically. As James Sterngold describes this in his WSJ article Uber’s Rise Has Taxi Lender Talking New Route, “But amid a taxi-business showdown that can look more like corporate mud wrestling than textbook market competition, Uber describes its service as a market disrupter and says the recent slide in medallion prices is just the beginning.” Investors in Medallion Financial beware, but this revolution is good for the overall consumer because it means that the supply of taxi like cars will more correctly meet the demand.

No longer will the Average Joe have to stand out on the street curb trying to hail down a taxi for half an hour in the pouring rain. No longer will Jane be late for her meeting because she couldn’t catch a taxi in time. With Uber’s revolutionary concept of its Surge pricing policies to encourage more drivers during high demand times. While these can run to 3x as expensive as a normal taxi trip, it is much more enjoyable than waiting an hour outside of Wrigley Field trying to find an open taxi after a Cubs win as this blogger has done! As Sterngold later mentions, “The taxi industry, including Medallion, and government rule makers “have propped up an artificial market for ages” by constructing “a castle of regulations,” says Corey Owens, head of global public policy at the San Francisco-based company. The result, he says, is that medallions have grown too expensive, making it tough for drivers to earn a living and stifling innovation.”’

This has to change, and Uber has its foot in the door trying to disrupt the ride sharing space, but it’s not going to be easy. As James Sterngold quotes Mr. Murstein, the president of Medallion Financial, “Owning a NYC. taxi medallion is like owning a piece of NYC.,” Mr. Murstein says. “I would never bet against them.” Well Mr. Murstein, it looks like NYC is about to change, for the better I might add!